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Rating Action:

MOODY'S DOWNGRADES TO Aa3 FROM Aa2 NEW JERSEY'S SCHOOL BOND RESERVE GUARANTEE PROGRAM (CHAPTER 72); OUTLOOK IS STABLE

13 Oct 2011

APPROXIMATELY $6.2 BILLION OF RATED LONG-TERM G.O. DEBT AFFECTED

New York, October 13, 2011 -- Moody's Investors Service has downgraded to Aa3 from Aa2 the rating of New Jersey'S School Bond Reserve Guarantee Program (Chapter 72), which guarantees debt service on general obligation bonds issued by New Jersey public school districts, as well as debt issued by New Jersey counties and municipalities for educational purposes. The outlook for the rating is stable. The rating action affects approximately $6.2 billion of rated long-term guaranteed debt outstanding.

SUMMARY RATING RATIONALE

The downgrade to Aa3 from Aa2 reflects Moody's view that the program reserve is thinly capitalized compared to its peer group of state school bond guarantee funds, providing it only a moderate ability to withstand defaults by several large issuers at once. Additionally, weak mechanical provisions compared to peers' heighten the chance that a default might occur due to human error, given the reserve's reliance on school district officials to inform the State of an impending default.

The Aa3 rating reflects Moody's assessment of the program's ability to make timely payments, should the need arise, on the $8.1 billion of guaranteed debt outstanding relative to the value of the program's reserve corpus, valued at $91.1 million as of June 30, 2010, the latest date for which audited financials are available. Additional credit considerations supporting the Aa3 rating on the Chapter 72 program include the high average credit quality of New Jersey school district debt guaranteed by the program; the reserve corpus's statutory protections as part of a constitutionally protected trust fund established for the purpose of generating income to fund public education in New Jersey; and statutory provisions facilitating timely reimbursement of the corpus following a draw through the interception of state aid moneys appropriated for issuers.

Of note, the program's rating is influenced by the financial condition of the State of New Jersey, which is currently rated Aa3/stable outlook, due to the program's reliance on statutory reimbursement mechanisms to replenish the reserve corpus, the oversight role performed by state treasury officials including the state treasurer when drawing on the reserve, and through the underlying ratings of New Jersey public school districts, whose individual ratings are also affected by the rating of the state through the state's provision of state aid revenues to partially fund school operations.

OUTLOOK

The assignment of a stable outlook to the rating reflects Moody's view that: (a) the constitutional and statutory protections in place to guard the reserve corpus are unlikely to be altered in the near term to make the corpus less secure; (b) state oversight of public school finances has become more, rather than less stringent in recent years; (c) the reserve's leverage will increase and then level off in the near future and remain constant thereafter due to existing statutory limitations; and (d) the Reserve's track record of never having been drawn upon in its 31-year history provides added comfort at the Reserve's present rating level.

STRENGTHS:

- Constitutional protections for corpus of parent fund as outlined in Article VIII of the New Jersey State Constitution

- Conservative and liquid investment portfolio

- Strong state oversight of New Jersey public school finances

- High average creditworthiness of New Jersey public school districts

- State aid intercept mechanism facilitates rapid replenishment following a draw

CHALLENGES:

- Exceptionally high leverage level among peer group as measured by size of Reserve corpus against total amount of guaranteed debt outstanding

- Mechanics are significantly weaker than those of peer group and rely heavily on local officials to identify impending defaults

- Operational oversight of corpus is relatively undeveloped

WHAT COULD CHANGE THE RATING - UP:

A statutorily mandated decrease in the Reserve's leverage level

Growth in the size of the Reserve corpus

Strengthening of the Reserve's legal framework and mechanical protections

Increase in the average credit quality of New Jersey public school districts

WHAT COULD CHANGE THE RATING - DOWN:

A statutorily mandated increase in the reserve's leverage level

Decline in the reserve corpus below the statutorily mandated level

Weakening of the reserve's legal framework

A decline in the average credit quality of New Jersey public school districts

Diminishment of the financial resources devoted to public school assistance by the State

The New Jersey Chapter 72 Bond Reserve rating was assigned by evaluating factors believed to be relevant to the credit profile of the guarantor such as i) constitutional and statutory protections for the corpus, ii) strong state oversight of school districts including district takeover authority, iii) state aid intercept use for replenishment of the corpus following a drawdown, iv) pool size and concentration, v) average creditworthiness of New Jersey school districts supported by the reserve, vi) management and governance of the reserve and vii) the nature and composition of the investment portfolio.

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Michael D'Arcy
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Julie Beglin
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S DOWNGRADES TO Aa3 FROM Aa2 NEW JERSEY'S SCHOOL BOND RESERVE GUARANTEE PROGRAM (CHAPTER 72); OUTLOOK IS STABLE
No Related Data.
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